We describe the main effects (both beneficial and harmful) that has the public deficit on business activity.
Lately, the public deficit refocuses interest. It is fundamentally debated to what extent it is advisable or not to continue advancing on the path of reduction or whether it is worth incurring slightly greater budgetary imbalances. Given all this, the question inevitably arises: how the public deficit affects companies.
Unfortunately, the answer is complicated. The effects are very varied and while some may tend to become possible levers for business advancement, others are potential important threats to its future. Let's look at the main repercussions.
The possible loss of international competitiveness
One of the objectives of an increase in the public deficit is to serve as a boost to demand in the country's economy. If achieved, it is likely that this will translate into a price increase, whose intensity can be variable.
Among the factors that stand out in the dimension of a possible inflationary effect, the labor impact and in the prices of other types of supplies. It is likely that, in the salary negotiations, many companies must face their workers' fear of having a loss of purchasing power. In line with this expectation, and in order to maintain the real value of salaries, salary costs may have to be increased.
If there is capacity to transfer that increase to prices, it might seem that the company is not under excessive pressure. In real terms, you pay an amount that has purchasing power similar to what you were paying. The problem is that, in other countries where there has not been an inflationary boost to demand, prices remain contained, which is an advantage for the competitiveness of their companies compared to those of countries with greater deficits.
Furthermore, it must be taken into account that These inflationary phenomena may have a certain capacity to continue feeding themselves. For example, the deficit produces inflation, which produces an increase in salary costs, which are transferred to the prices of all consumers and companies have to pay, thus fueling inflation again.
The possible benefit of boosting private consumption
The dynamism of private consumption It is important for many companies. It is especially so for those that sell goods or provide services directly to individuals. But it is also the case for others whose clients are precisely companies closely linked to the end consumer. In any case, it is a sample of confidence in the near future of the economy that has beneficial effects for all companies.
However, there is a long discussion among macroeconomists of the effects of the deficit on private consumption. On the one hand, there are those who maintain that families spend based on the income they have in that specific period. The deficit would allow increasing expenses that would increase the demand of the economy without having to transfer it to taxes that reduce the availability of family pockets to spend.
Another sector of macroeconomists maintains that family consumption is linked to factors related to the long term. Although they have more room to spend as a result of the public deficit, they may withdraw and may prefer to save, especially because of the expectation that the deficit will be accompanied by tax increases in the future.
The expectation of higher taxes in the future
The public deficit is transferred to indebtedness. If governments cannot indefinitely defer payment of their debts, it is reasonable to think that this could lead to a tax increase at some point, especially when economic growth is not vigorous enough to reduce the proportion that public debt represents in the economy. GDP.
Furthermore, in this context, the tax system of the future can be a source of uncertainty. We can sense an increase, but we do not know in what taxes. Therefore, we do not know to what extent it could affect companies and which economic sectors would be affected.
However, yes There are sectors that are especially vulnerable, even when we still do not know what taxes could rise. These are, for example, those that have a lot of international competitive pressure, who cannot easily pass on tax increases to their clients. The same happens with those who have strong pressure from goods or services that are close substitutes for their own. It also greatly affects companies that produce goods or services whose demand is greatly reduced due to price increases.
The greatest slack for public investment
The deficit makes it easier to undertake public investments. Behind it there are many companies waiting attentively for public contracting opportunities.
They hope to be able to undertake projects that go hand in hand with those of the Administration. If they receive many orders, they can make investments to serve them, which can benefit their productivity.
Another beneficial effect for them is related to the learning. As more and larger public contracts are executed, they acquire a experience that is refining its processes and, therefore, providing an improvement in its costs and competitiveness.
Even when they foresee a possible future retraction of public investment to redirect the path of public finances towards stability, the benefit that learning produces is important, since it is transferable to other countries, especially considering that every day more companies participate in public procurement in other states.
The pressure on the credibility of public finances
Public finances are of interest to all companies to the extent that they determine their own financing possibilities. On the one hand, the capital costs of its debt and equity are influenced by the profitability offered by public debt.
On the other hand, the deficit increases the pressure of the State on the savings availability. If agents who save increasingly lend to the State, business financing is progressively displaced.
Furthermore, the sustainability of public accounts is one of the important indicators of the risk that a State may make decisions in the future that may affect business finances, even beyond tax increases.
The current containment of fiscal pressure
With a budget deficit it is possible to sustain a certain public expenditure without undertaking increases in the tax pressure, for now. Although tax increases or cuts in public consumption and investment may come in the future, the truth is that today offers possibilities to spend more without having to raise taxes to the same extent as would be done in a budget path more tending to balance.
Preventing deflationary threats
There are economic times in which many companies fear the deflation. They do so because it has significant power to erode confidence in the economy, to cause reductions in demand, to cause underuse of material and human resources and, above all, to feed itself for prolonged periods of time.
In that sense, the public deficit has been pointed out many times as a tool in the fight against deflation. The State would try to spend what the private sector does not spend with the aim of recovering demand, confidence in the economy and prices.
The effect on demand variability
In times of crisis, with greater or lesser effectiveness, it aims to serve as an instrument to that demand does not suffer excessively. This provides companies with an attempt to support their expectations, which become a little more stable.
Projecting possible scenarios of lower demand in times of crisis would have beneficial effects from a financial point of view for many companies. Their projects are more credible and there is greater confidence that they can overcome a period of crisis.
The public deficit, its increases and reductions, including expectations about its future behavior, is a travel companion with whom they must learn to coexist entrepreneurial people.
Fountain: SAGE
